3-Year Repayment of Covid-19 Related Distributionss
In 2020 several provisions were enacted during the pandemic to help families who were struggling due to Covid-19. You may recall the early withdrawal penalty from qualified retirement plans was waived and the IRS deferred tax on retirement distributions. The CARES Act waived the early withdrawal penalty up to $100,000 pf coronavirus related distributions made within 2020 before December 31st.
The catch is all taxes are deferred from in coronavirus distributions and are to be repaid over a 3-yeartime period. The other option is to avoid paying any taxes taxpayers may make contributions to their retirement plan totaling amounts withdrawn under coronavirus relief within 3 years. Only coronavirus-related distributions that are eligible for tax-free rollover treatment under Section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) may be recontributed. If contributions are made it will be treated as 60-day rollover which is not taxed. any coronavirus-related distribution from a workplace retirement plan or IRAis not eligible to be repaid.
In other words, the taxpayer can recontribute the money taken as a coronavirus-related distribution back into the plan for a period of 3 years beginning the day after the contribution without penalty or tax consequences. Repaid amounts are not subject to any contribution or rollover limits. Taxpayers are also able to claim a refund for any amounts contributed into the retirement plan that was already included as income!
If you don’t have a qualified IRA account, any coronavirus related distributions must be included in your taxable income for the next 2 years. Don’t forget to let your tax preparer know of any IRA distributions were made in 2020 and how much you want to include in your income. We are very thorough with our tax clients as we are preparing taxes, we will see based off your refund amount or taxes due, what’s the best amount to claim this year.